The real estate market can be extremely receptive to low prices, so if you list your house very low, you're likely to sell it much faster. The bulk of the money the agents make will come from the part of the house that could sell very easily. If a house could sell for $200,000 today, but you have to have it listed six months before it could sell for $220,000 (which is unknown at the time, of course). The seller agent is going to make $6,000 of the $200k sale (3%) but will only make $600 more from selling it for an extra $20,000. And a lot of the time that 3% number is high. If they aren't a broker, they're splitting that 3% with someone else, so maybe the extra $20k sale price only nets them an extra $300 in their pocket.
When I was selling my house a few years ago, I talked with one agent that was recommended to me and he was so blatantly obvious in his desire to get commissions that I couldn't believe the people who recommended him failed to see that. He came in, refused to list the house for less than a 6% split (this is negotiable, 5% isn't uncommon at all) and wanted to LIST the house for around $8,000 less than what I actually sold it for a few months later. It wasn't that big of a house and was in an area with very affordable housing, so that extra $8,000 was high enough of a total % to make a huge difference.
Also, I'd venture that many people selling their houses still have a mortgage on the house, so the huge base commission the seller agent makes isn't even coming off of the owner's profit, it's coming of the amount they need to pay back the note.
This tactic has been used to great effect over the last few years in the area North of San Francisco. I bought a house a year ago, and this was particularly annoying as it made it hard to determine what houses were really available in our price range, since listed prices were often fictional. Brokers suggested coming in $5k to $15k above listed price as an initial bid if others seemed interested, just so you would be taken seriously.
Edit: s/$15k to $15k/$5k to $15k/
Anyway, in my experience, most agents are happy wasting a bunch of time on a sale - having coffee to discuss 'the status' (2 viewings scheduled for next week, the one from last Monday seemed genuine - could have send me a 2 line email. But hey, he could tell funny stories, so I don't mind having coffee); spending 45 minutes on discussing 'the strategy' on how to deal with an offer, ... I never got the impression they cared about a house being a few months longer in their inventory. It filled up their website and office windows, made them big and professional, and as long as their cash flow is OK, anything listed for under a year was OK (much longer than that makes them look weak, of course; also, the market is bad in my area anyway).
I have since reconsidered what I once thought was a plausible argument about real estate agents. Maybe it's sample bias, I don't know, but the ones I dealt with, weren't 'rational actors' in any sense an economist would need them to be to make their models work (and I work with economists and their models a lot).
The Freakonomics model completely misses the fact that most agents don't often have enough houses to sell for the time spent on each one to be a constraint.
Given that, in many circumstances it really does make sense for the agent to spent an extra few hours working on your house if it will get you another 10K, because they get a small amount of money from that. It's true the marginal gains aren't high, but often they simply have nothing else to do!
Additionally, "working on your house" often means meeting more people who are interested in buying. Very often, some of those people will be looking for an agent to sell their house, so the agent sees that as an advertising opportunity.
He probably wasn't. That having been said, the inability to understand abstract concepts like the time value of money and being a kickass salesman are not mutually exclusive. Some of the best agents I've met aren't what I'd call bright, but they're quite successful and have incredible sales skills that smarter agents lack.
> Anyway, in my experience, most agents are happy wasting a bunch of time on a sale - having coffee to discuss 'the status' (2 viewings scheduled for next week, the one from last Monday seemed genuine - could have send me a 2 line email.
This isn't remotely irrational -- you just don't understand his purpose. What he's doing by spending 45 minutes chatting with you, in leu of a 2 line email, is building a relationship with you and giving the transaction a more personal touch. These are the kind of soft sales skills that are critical to being a successful agent, since despite the existence of sites like Trulia or Zillow, the majority of your clients will come not from online advertising but from word of mouth. So sure, a 2 line email might have sufficed, but a 45 minute chat where he tells you funny stories is going to leave you feeling a lot better cared for (because, well, you are), and leaves you more inclined to recommend him to your friends in the future.
Plus, you said it's a bad market. It's probably not the case that he has clients banging down his doors, so he needs to make sure that his existing clients are well cared for to ensure future business.
Whether that's 'irrational' depends on your definition of 'irrational' - it surely is irrational from the point of view of pretty much every economic model out there.
To use a tech analogy, this is like suggesting that Zappos customer service ought to be replace by a knowledge base and automatic responders, since spending all that time and money to have human representatives to make customers happy is inefficient and irrational when it could be done cheaper.
This excludes more abstract, intangible elements of the exchange that are likely to lead to increased income down the road, but it also excludes behaviors that aren't geared toward maximizes income. It's totally possible that a person is behaving rationally with a different, more abstract goal in mind, prioritized above money over time, like building good friendships or having a flexible schedule. In fact, people make those kinds of tradeoffs where they explicitly prioritize an intangible, subjective quality of life measurement over raw income all the time, but economic models don't account for this.
I don't think too many agents are overly crass in their taking advantage of sellers by pushing lowball offers. I think most homeowners can develop a general idea of what their house is worth if they just do basic comparisons, and if they have a mortgage or other obligations they must pay out of the home sale, can develop a halfway decent bottom-line figure. Also, when homeowners meet with an agent, one of the first things they discuss after seeing the property is listing price. The agent is incentivized to provide a non-lowball listing price because the owner has yet to sign a contract at that point and could still be soliciting other agents.
I think the real leveraging of the agents commission structure comes on more borderline decisions. For a $300,000 house, maybe the owner won't accept $275,000, but if an offer for $290,000 comes in, the agent may advocate for that offer just to get the deal done, even if she think a $300,000 offer will come in a few weeks.
See my comment below about LTV--if a consumer feels they aren't being treated well, the agent might make a bit more on this sale, but lose five figures of income later. Just like that agent that you interacted with.
Now, if you feel like the consumer isn't educated enough to know they are being treated with care, well, that's a different discussion entirely.
Like with most things, you're best bet is to do the research and gather several options. When I was selling my house, I spoke with three or four agents and ultimately chose a flat-fee MLS service.
I think that technology can empower the consumer, but doubt it can empower the consumer enough to eliminate middlemen (of which brokers are one type). I've heard that story before, and all I saw was a different kind of middleman (heck, Amazon.com is a middle man for a lot of products).
So, that said, how can you align incentives? You have a limited number of ways to pay the middleman or broker: you can pay them a flat fee, you can pay them an hourly rate, or you can pay them based on the size of the deal. Which incentive structure do you think aligns interests the best?
Say you have a tiny house that could reasonably sell in the range $90k-$110k, depending on how hard the broker works. If you give the broker 5% of the sales price, then he gets $5k on average, but on the margins he only sees $50 for every $1k he can raise the price by negotiating. So instead, give him 50% of ever dollar of the sales price over $90k. Now he still makes $5k on average (i.e. 50% of the average $10k over the lower-bound of $90k), but on the margins he gets $500 for every $1k he increases the price by negotiating hard!
Needless to say, there are all sorts of other ideas smart people could come up with. Often, the reason these don't work is because they seem complicated, and it's hard as a consumer to assess to broker-fee structure itself (a sort of market failure). But there's a good chance that technology can change this, by making info related to broker fee structures more accessible and more transparent. For instance, data about average broker fees, the distribution of house sales prices, etc. could be collected by a tech start-up, which would have been unfeasible to collect in the past.
Oh, also the _seller_ is typically the party that actually pays the buyer's agent. Yes, this is pretty messed up.
This actually depends on if your state's regulations permit dual agency or not; some states, e.g. Massachusetts, permit one agent to represent both parties. Other states, like Florida, forbid it due to the potential conflict of interest.
Either way, though, avoiding dual agency is probably a good call. It's fraught with potential problems, and even if the agent cuts perfectly square corners, the quality of representation will still suffer since the agent must keep both parties in mind at all times.
I was surprised to read this, since I thought you'd hinted at exactly the opposite by mentioning Freakonomics. Isn't the Freakonomics argument that an agent is incentivized to instead sell the property as quickly as possible, regardless of the sale price? For instance, accepting an offer that is $10k under the listing price will cost the seller $9,400 ($10,000 * 94%), but will only cost the selling agent $150 (1.5% * $10,000). If the agent's time is worth almost anything approaching a respectable hourly rate for a sales professional, then they should pressure the seller to take the lower offer, as not doing so would likely incur significant time costs (well over $150 worth of their time) for the listing agent.
Is that view of things mistaken?